The Trading Characteristics of the Forex Market

By: Justin Stewart

Despite the global significance of the forex market, there are no centrally cleared or unified markets designated for the majority of forex trading. Additionally, there is very little regulation involving cross-border rulings. Instead, one will find quite a variety of interconnected markets allowing the trading of different currency instruments.

This is due largely in part to the Over-the-Counter (OTC) fashion in which currency markets conduct the majority of their trading activities. The implication follows that there will be a variety of different prices (rates) rather than a single monetary entity, depending on which bank or "market maker" is conducting the trading.

Suffice it to say, the rates are kept fairly close so as to deter and eliminate the activities of the arbitrageurs --- one who engages in the act of arbitrage. Arbitrage is defined by Dictionary.com as "In finance - the simultaneous purchase and sale of the same securities, commodities, or foreign exchange in different markets to profit from unequal prices." Last year (2007) saw the Chicago Mercantile Exchange and Reuters engage in a joint venture called FxMarketSpace which is a centralized clearing mechanism used by the forex market.

There are four primary trading centers in the forex market:

1. Hong Kong

2. London

3. Singapore

4. Tokyo

But banks globally participate in the market, and currency trading continues throughout the day on a 24 a day basis (except on weekends) as a result. As the Asian trading ceases, the European market opens. Finally the North American market follows suit, and then the cycle starts all over again, creating the around-the-clock scenario.

The forex market provides the trader or brokers with little or no "inside information" and fluctuations in the exchange rates are normally the result of monetary flows, as well as the expectation (or speculation) in the directional changes of these monetary flows. Such changes can be caused by any (or a combination) of the following factors:

* Budget

* GDP (gross domestic product) growth

* Inflation

* Interest rates

* Large cross-border merger and acquisition transactions

* Trade deficits and surpluses

* Other macro-economic conditions

Active individuals in the forex market have access to any pertinent news about the market based on the fact that media information is released on scheduled dates on a publicly displayed basis. This becomes the only type of inside information that is ever available to participants in the forex market. However, due to fact that the banks are visually made aware of their customers' order flow, this gives the larger financial entities a decided advantage over the other market participants.

The standard practice is for the different currencies to be traded against one another. Each pair of currencies is normally designated as "XXX/YYY", with the XXX or the YYY being the 3-digit ISO 4217 currency code (the ISO is the International Organization for Standardization). As an example, if you wanted to see how the Euro was priced in United States dollars, then you would look for the EUR/USD notation. Normally, the first one of the paired currencies is the base or stronger of the two, and the second is the weaker one based on where the monetary amounts stood on the market at the creation of the particular pairing of currencies.

Foreign Exchange
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